Technology Sector M&A in Q3 2016
Global M&A dealmaking in 2016 has not been able to achieve the same record heights reached last year*, with political uncertainty, increased regulation and decreased confidence all weighing down activity. Despite this, M&A deal value has experienced two quarterly value increases this year, with Q3 (US$ 812.9bn) increasing 8.8% compared to Q2 (US$ 747.2bn). Despite concerns surrounding Brexit, the immediate drop in sterling following the referendum vote caused opportunistic dealmakers to engage in a bargain hunt for UK assets. As a result of a few big-ticket deals, Q3 inbound activity into the UK (US$ 49.3bn, 121 deals) jumped 283.0% by value compared to Q2 (US$ 12.9bn, 159 deals).
Kingston Smith has analysed 94 deals recorded on our Technology Deal Tracker in Q3 2016. Here are some of our highlights of the quarter:
Inbound activity dominates
The most tangible impact of the EU referendum vote was the depreciation of sterling against a basket of currencies. Consequently, UK companies have become significantly cheaper to overseas acquirers. In Q3 we saw the initial impact of this with 63% of cross border transactions being inbound with just under half of overseas acquirers originating from the USA. The infographic below shows the origin of buyers (left segments) and sellers (right segments) for cross-border transactions involving the UK:
One such cross-border deal was the sale of UK based ARM Holdings to Japan’s Softbank Group for £24.3bn, a 43% premium to its stock market value is undoubtedly the biggest Tech M&A story of the year. ARM has for a long time been a much celebrated British success story and the sale to Softbank underlines this. The deal was also an immediate post EU referendum boost to the sector underlining that the UK is open for business.
Pay2Global, a regulated digital international money transfer company was another UK company that was purchased by an overseas acquirer. Netherlands based TerraPay, owned by the Indian conglomerate Mahindra, acquired Pay2Global to help scale its footprint in the 32 countries of the EEA. Pay2Global currently benefits from EU passporting regulations allowing it to offer financial services to the rest of the EEA. The enlarged company will no doubt be playing close attention to the on-going Brexit negotiations.
UK domiciled Dentsu Aegis continues to rival WPP in the acquisition stakes. In Q3 Dentsu Aegis announced two significant deals, it acquired programmatic buying platform Accordant Media and also announced an agreement to acquire a majority stake in data driven technology-enabled performance marketing agency Merkle. Programmatic marketing is growing rapidly with eMarketer expecting double digit growth in the sector to continue through 2017. We expect to see continued acquisition activity in the ad tech sector for the foreseeable future.
Internet of Things
The exponential rise in the number of devices connected to the internet continues at a pace with the Internet of Things revolution starting to gain traction with household devices such as internet connected fridges, dishwashers and central heating systems becoming more and more common in households. Analyst firm Gartner estimates that by 2020 there will be over 26 billion connected devices. This exponential growth and perceived intrusion into previously private spaces will raise security concerns for many. UK based Internet Security company BullGuard has sought to capitalise on this through the acquisition of Israeli based “security of things” specialist Digi-Labs.
The UK’s geopolitical, legal and economic situation will dominate for the foreseeable future and the outcome of all the Brexit negotiations will undoubtedly have a profound impact on the M&A market. The UK has always and will continue to have talented companies and individuals in the tech sector and we see no reason for this not to continue. In the short term there will clearly be uncertainty which often puts off acquirers and so may mean that the more speculative acquisitions do not materialise however the depreciation of the sterling, particularly against the US Dollar means that we expect deal activity to remain strong.
*Mergermarket’s Q3 trend report